In a recent case, Powell v Romano, the Michigan Court of Appeals ruled that a bank’s mortgage was not valid against a party living on land under a land contract.
Under Michigan law, in order to protect an interest in land one must record that interest in the county in which the land is located. By recording the interest, one puts other parties on notice of the interest, whether it is an ownership or security interest. Michigan has a race-notice statute. Under a race notice statute, the party that first records its interest in the land has priority over later recording parties. However, if a party has notice of an interest held by another, that is unrecorded, then the parting recording does not have priority.
In Powell, the plaintiffs purchased a home under land contract and lived there continuously after their purchase. However, the plaintiffs failed to record the land contract with the county. Several years later, the land contract seller granted First State Bank a mortgage on the property to secure a loan. The Bank recorded its mortgage.
The plaintiff’s brought suit against the seller and the Bank and argued that the Bank’s interest in the property was unenforceable against the plaintiff because the Bank was not a bona fide purchaser. Specifically the Bank had knowledge of the plaintiff’s interest in the land because the plaintiffs resided on the property at the time the seller granted the Bank a mortgage. As a result, the Bank’s mortgage was not effective against the plaintiffs.
Although the Court ruled in favor of the plaintiffs in this case, it is still critical that a party records its interest in land. This case could have turned out differently if the plaintiff were not residing on the property. Had the property been vacant, the Bank probably would not have had notice of the plaintiff’s interest in the land and the plaintiff’s would have lost the property.
